Mifid II conundrum: how do managers value good research?

After years of worrying about how to buy and sell research under the new Mifid II rules, what if someone found a way around it?

Well, a number of brokers, including WH Ireland, have been able to put out their research for free, under a little-known piece of legislation from the European Commission (EC). (See below)

Following the implementation of Mifid II at the start of the year, WH Ireland has constructed a strategy which allows it to provide corporate-sponsored research for its corporate clients and any investment firm that requests it for free. It also offers non-corporate research, which investment firms have to pay for.

However, accepting this research for wealth and asset managers could be a bit of a minefield.

Nick Burchett, head of UK equities at Cavendish Asset Management, said it is all about being careful to avoid an inducement to trade.

‘Some take a hard line approach and don’t accept anything, as you don’t want to get caught out by the inducement angle,’ he said. ‘Is [free corporate-sponsored research] allowable? We haven’t got any guidance. When is it minor, and when does it become major?’

It pays to be cautious

Ben Seager-Scott, chief investment strategist at Tilney, said: ‘It’s all well and good getting this research, but you have to be wary, have they got an angle?

‘[Firms] who make a lot of money on equity trading, shock horror they write something that makes you want to trade equities.’

John Cummins, managing director for institutional research at WH Ireland, defended his firm’s approach and said the corporate-sponsored research is not an inducement to trade.

He said: ‘The broker has to be contractually obliged, the relationship has to be disclosed… there’s no expectation of payment [for the research]. This is aimed at smaller companies. We are not a big FTSE company with 30 analysts.

‘We split research distribution into corporate research, which is sent to corporate clients and a number of investment firms without a charge, and non-corporate research which investment firms pay to access.’

Some in the industry have argued that while free corporate-sponsored research may be within the rules, it is not in keeping with the spirit of the new regulation.

But Cummins rejected that notion: ‘I’d disagree that it’s not in the spirit of Mifid II. There are other firms doing it. Everyone’s got their own business model. This is focused on the smaller side, the sub FTSE 250 sized firms.’

For the wealth boutiques, could such free research be a viable option, given that even the most basic research packages from the major investment banks can cost $10,000 (£7,000)?

No such thing as a free lunch

Caroline Shaw, head of fund and asset management at Courtiers, does not think so: ‘Anything that’s free is not worth having. Who takes that sort of research seriously? The industry has got to move on and accept that research has a cost. If you don’t have the internal research capability, pay for it. You can’t have a halfway house where you use some research for free.’

Shaw added that after discussing costs, Courtiers decided to bring its research in-house, and only subscribes to two research providers. She said: ‘We had free research for a lot of years, but to be honest it’s been a great joy to get rid of it. There’s five of us in the investment team, including two trained economists. A lot of it we can do ourselves. We pay for some research, such as investment trust research, macro research, we pay for where the gaps are.’

While for Tilney, Seager-Scott said the firm can also do a lot of research itself given its size, but has also been paying for third party research for several years.

He said: ‘We’ve never been reliant on freebies from research providers. We’ve used some of the independent research providers with a subscription model where they have no angle.’

But he added the cost could be higher for boutiques: ‘As we’ve seen, the larger the company the relatively smaller the cost, so I can see how it would be tougher for the small boutiques in getting paid research.’

What is the legislation that allows free research?

It all revolves around Article 12 of the European Commission’s Mifid II Delegated Directive, covering ‘inducements in respect of investment advice on an independent basis or portfolio management services’, and what counts as a ‘minor non-monetary benefit’.

The specific section brokers have been referring to is paragraph 3b. This states that minor non-monetary benefits include ‘written material from a third party that is commissioned and paid for by a corporate issuer or potential issuer to promote a new issuance by the company, or where the third party firm is contractually engaged and paid by the issuer to produce such material on an ongoing basis, provided that the relationship is clearly disclosed in the material and that the material is made available at the same time to any investment firms wishing to receive it or to the general public’.

It has also been incorporated into the FCA Handbook, Conduct of Business sourcebook, as well as the European Securities and Markets Authority (Esma) technical guidance.

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